Compensation and Rewards for Environmental Services in the Developing World:

Framing Pan-Tropical Analysis and Comparison Brent Swallow, Mikkel Kallesoe, Usman Iftikhar, Meine van Noordwijk, Carina Bracer, Sara Scherr, K.V. Raju, Susan Poats, Anantha Duraiappah, Benson Ochieng,

Compensation and Rewards for Environmental Services in the

Developing World: Framing Pan-Tropical Analysis and Comparison

Brent Swallow, Mikkel Kallesoe, Usman Iftikhar, Meine van Noordwijk,

Carina Bracer, Sara Scherr, K.V. Raju, Susan Poats, Anantha Duraiappah,

Benson Ochieng, Hein Mallee and Rachel Rumley

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Correct citation: Swallow B, Kallesoe M, Iftikhar U, van Noordwijk M, Bracer C, Scherr S, Raju KV, Poats S, Duraiappah A, Ochieng B, Mallee H and Rumley R. 2007. Compensation and Rewards for Environmental Services in the Developing World: Framing Pan-Tropical Analysis and Comparison. ICRAF Working Paper no. 32. Nairobi: World Agroforestry Centre.

Titles in the Working Paper Series aim to disseminate interim results on agroforestry research and practices and stimulate feedback from the scientific community. Other publication series from the World Agroforestry Centre include: Agroforestry Perspectives, Technical Manuals and Occasional Papers. Published by the World Agroforestry Centre United Nations Avenue PO Box 30677, GPO 00100 Nairobi, Kenya Tel: +254(0)20 7224000, via USA +1 650 833 6645 Fax: +254(0)20 7224001, via USA +1 650 833 6646 Internet: www.worldagroforestry.orgContact Brent Swallow: B.Swallow@cgiar.org © World Agroforestry Centre 2007 Working Paper no. 32 The views expressed in this publication are those of the author(s) and not necessarily those of the

World Agroforestry Centre and co-publishers.

Articles appearing in this publication may be quoted or reproduced without charge, provided the source

is acknowledged.

All images remain the sole property of their source and may not be used for any purpose without

written permission of the source.

With generous support of the International Development Research Centre, Canada

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The World Agroforestry Centre (ICRAF) and a diverse team of partners were tasked by the International Development Research Centre (IDRC) to contribute to the conceptualization and development of their Rural Poverty and Environment (RPE) programme related to Compensation and Rewards for Environmental Services (CRES) by providing an overview of relevant developments in Africa, Asia and Latin America, a global synthesis of results and recommendations. Truly global in nature, the CRES Scoping Study was undertaken by the following partners and collaborators based in 7 countries across 4 continents. African Centre for Technology Studies (ACTS) is a Nairobi-based international intergovernmental science, technology and environmental policy think-tank that generates and disseminates new knowledge through policy analysis, capacity building and outreach. The Centre strives to rationalize scientific and technological information to enable African countries make effective policy choices for improved living standards. ACTS works with partners and networks including academic and research institutions, national governments, UN bodies, regional and international processes and NGOs. ACTS' research and capacity building activities are organized in five programmatic areas: Biodiversity and Environmental Governance; Energy and Water Security; Agriculture and Food Security; Cross-Cutting Issues; and Science and Technology Literacy. Its members include the Governments of Kenya, Malawi, Malta, Uganda and Ghana, as well as the World Agroforestry Centre (ICRAF) and the Third World Academy of Sciences (TWAS). www.acts.co.ke Corporación Grupo Randi Randi (CGRR) is a non profit corporation, whose mission is to build and motivate equitable development and a healthy environment, stimulating the imagination, creativity and the talent of our collaborators, incorporating gender, generation and ethnic equality, local participation, the sustainable management of natural resources and the conservation of biodiversity. CGRR was legalized in Ecuador in 2000, currently has 17 members, and operates a range of research and development projects, with international and national funding, ranging from participatory watershed management, watershed inventories and modeling, gender and environment, community conservation, conservation planning for protected areas and integrated crop management for sustainable development. CGRR is a member of the Consorcio para el Desarrollo Sostenible en los Andes, CONDESAN, the International Union for the Conservation of Nature (IUCN), the Ecuadorian association of environmental NGOs, CEDENMA, and is a founding member of RISAS, a national network focused on the study and promotion of environmental services research and action. Further information on CGRR is available on the website www.randirandi.org Forest Trends is an international non-profit organization that works to expand the value of forests to society; to promote sustainable forest management and conservation by creating and capturing market values for ecosystem services; to support innovative projects and companies that are developing these new markets; and to enhance the livelihoods of local communities living in and around those forests. We analyze strategic market and policy issues, catalyze connections between forward-looking producers, communities and investors, and develop new financial tools to help markets work for conservation and people. www.forest-trends.org

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Institute for Social and Economic Change (ISEC) is an All India Institute for Interdisciplinary Research and Training in the Social Sciences, established in 1972 by the late Professor V K R V Rao. It is registered as a Society under the Karnataka Societies Registration Act, 1960, to create a blend of field-oriented empirical research and advances in social science theories leading to better public policy formulation. Its mission is to conduct interdisciplinary research in analytical and applied areas of social sciences, encompassing diverse aspects of development; to assist both central and state governments by undertaking systematic studies of resource potential, identifying factors influencing growth and examining measures for reducing poverty and to establish fruitful contacts with other institutions and scholars engaged in social science research through collaborative research programmes and seminars, and to conduct training courses and refresher programmes for university and college teachers and public functionaries. www.isec.ac.in The World Conservation Union (IUCN): Founded in 1948, IUCN brings together States, Government agencies and a diverse range of NGOs in a unique partnership with over 1,000 members spread across some 150 countries. As a Union IUCN seeks to influence, encourage and assist societies throughout the world to conserve the integrity and diversity of nature and to ensure that any use of natural resources is equitable and ecologically sustainable. www.iucn.org The United Nations Environment Programme (UNEP) is the voice for the environment in the United Nations system. It is an advocate, educator, catalyst and facilitator, promoting the wise use of the planet's natural assets for sustainable development. UNEP's mission is "to provide leadership and encourage partnership in caring for the environment by inspiring, informing, and enabling nations and peoples to improve their quality of life without compromising that of future generations." www.unep.org The World Agroforestry Centre (ICRAF) is the international leader in the science and practice of integrating ‘working trees’ on small farms and in rural landscapes. We have invigorated the ancient practice of growing trees on farms, using innovative science for development to transform lives and landscapes. The World Agroforestry Centre is one of the 15 centers supported by the Consultative Group on International Agricultural Research (CGIAR). www.worldagroforestry.org

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About the authors

Brent Swallow Principal Scientist and Theme Leader for Environmental Services, World Agroforestry Centre (ICRAF) Nairobi, Kenya. Overall Coordinator of the CES Global Scoping Study.

Mikkel Kallesoe Senior Programme Officer, Asia Regional Environmental Economics Programme, World Conservation Union (IUCN), Colombo, Sri Lanka.

Usman Iftikhar Environmental Economist, Coordinator, Asia Regional Environmental Economics Programme, World Conservation Union (IUCN), Colombo, Sri Lanka.

Meine van Noordwijk Regional Coordinator, Southeast Asia Programme, World Agroforestry Centre (ICRAF), Bogor, Indonesia.

Carina Bracer Project Manager with the Ecosystem Services Program, Forest Trends, Washington, DC, USA. Manages the new regional Katoomba Group for Tropical America, including strategic linkages to the Ecosystem Marketplace.

Sara Scherr Agricultural and natural resource economist specializing in land and forest management policy in tropical developing countries. Director of Ecoagriculture Partners, an international partnership to promote increased productivity jointly with enhanced natural biodiversity and ecosystem services in agricultural landscapes.

K.V. Raju Professor and Head, Centre for Ecological Economics and Natural Resources (CEENR), Institute for Social and Economic Change (ISEC), Bangalore India.

Susan Poats Anthropologist with a strong commitment to conservation and sustainable development. She is a founding member of Corporación Grupo Randi Randi (CGRR), Quito, an Ecuadorian non-profit organization.

Anantha Duraiappah Chief, Analysis and Emerging Issues Unit, Division of Environmental Law and Conventions (DELC), United Nations Environment Programme (UNEP) Nairobi, Kenya.

Benson Ochieng African Centre for Technology Studies (ACTS), Nairobi, Kenya. Currently Institute for Law and Environmental Governance, Nairobi, Kenya.

Hein Mallee Senior Programme Specialist, Rural Poverty and Environment programme (RPE) International Development Research Centre (IDRC), Singapore.

Rachel Rumley Media Associate, World Agroforestry Centre (ICRAF) Nairobi and Assistant Coordinator Global Scoping Study on CES.

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Abstract This is the first of a series of nine papers exploring the state of the science and practice of

compensation and rewards for environmental services in the developing world. This study has

been undertaken to address key questions about the impact and future prospects of

compensation and rewards for ecosystem services, and the potential role of research and policy

engagement in helping to make these instruments more beneficial to the poor in the developing

world. The papers resulting from this study have been prepared by an international group of

authors as part of a pan-tropical scoping study for the Rural Poverty and Environment

Programme of the International Development Research Centre of Canada. All of the papers

focus on the frontiers between the ecosystems that underlie rural livelihoods, the

environmental services that those ecosystems generate, and the human well-being of rural

populations.

This introductory paper begins with a review of the recent historical development of

compensation and reward mechanisms within a broader context of changing approaches to

conservation and environmental policy. Conservation approaches have moved from a sole

focus on protected areas, to integrated conservation and development projects, to landscape

management approaches, and now, consideration of conservation contracts. At roughly the

same time, there has been a general relaxation of government enforcement of environmental

regulations towards more multi-stakeholder forms of governance in which non-governmental

and international organizations play roles and a variety of market-based and negotiation

approaches have come to the fore. That dynamic context is fostering greater interest in

mechanisms for compensation and reward for environmental services in the developing

regions of the world. Later sections of the paper clarify key concepts and present a conceptual

framework for characterizing different types of mechanisms and the internal and external

factors affecting those mechanisms. The penultimate section summarizes experience and

perceptions of compensation and reward for environmental services. The concluding section

postulates the alternative motivations that are shaping compensation and reward mechanisms

in the developing world.

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Keywords

Environmental services, conservation, compensation and reward mechanisms, ecosystem

services, ecosystem stewards, environmental service beneficiaries, payment for environmental

services

Acknowledgements

The ideas presented here have gradually matured in discussions with many of the participants

to the Regional Workshops, the final writeshop and (co)authors of other issue papers. We

gratefully acknowledge their interest and discussion. We also acknowledge the generous

financial and intellectual support of the International Development Research Centre of Canada

(IDRC), particularly the Rural Poverty and Environment Group.

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Preface

From the beginning of 2006 until March 2007, the World Agroforestry Centre (ICRAF) led a consortium of organizations and individuals from around the world in a pan-tropical scoping study of Compensation and Rewards for Environmental Services (CRES). The scoping study was commissioned by the Rural Poverty and Environment Programme of the International Development Research Centre of Canada (IDRC) to identify critical issues affecting the development, operation, impacts and institutionalization of mechanisms linking beneficiaries of ecosystem services with stewards of those ecosystems. Particular attention is paid to the potential for CRES to alleviate or exacerbate the multiple dimensions of poverty: rights to productive assets, streams of income and consumption, and vulnerability to shocks. The scoping study included a series of regional workshops held in Latin America (Quito, Ecuador), Asia (Bangalore, India) and Africa (Nairobi, Kenya). Participants presented and discussed practical CRES experiences from across the developing world, experiences which informed and challenged the development of several cross-cutting issue papers. A series of nine working papers have been prepared to summarize the results of the scoping study, including an introductory paper, three regional workshop reports, and five issue papers on key topics. ICRAF Working paper 32 – Compensation and Rewards for Environmental Services in the Developing World: Framing Pan-Tropical Analysis and Comparison.

ICRAF Working paper 33 – Report on the Latin American Regional Workshop on Compensation for Environmental Services and Poverty Alleviation in Latin America.

ICRAF Working paper 34 – Asia Regional Workshop on Compensation for Ecosystems Services. A component of the global scoping study on compensation for ecosystem services.

ICRAF Working paper 35 – African Regional Workshop on Compensation for Ecosystem Services (CES).

ICRAF Working paper 36 – Exploring the inter-linkages among and between Compensation and Rewards for Ecosystem Services (CRES) and human well-being: CES Scoping Study Issue Paper no. 1.

ICRAF Working paper 37 – Criteria and indicators for environmental service compensation and reward mechanisms: realistic, voluntary, conditional and pro-poor: CES Scoping Study Issue Paper no. 2.

ICRAF Working paper 38 – The conditions for effective mechanisms of Compensation and Reward for Environmental Services (CRES): CES Scoping Study Issue Paper no. 3.

ICRAF Working paper 39 – Organization and governance for fostering pro-poor Compensation for Environmental Services: CES Scoping Study Issue Paper no. 4.

ICRAF Working paper 40 – How important will different types of Compensation and Reward Mechanisms be in shaping poverty & ecosystem services across Africa, Asia & Latin America over the next two decades? CES Scoping Study Issue Paper no. 5. The working papers are designed for relatively limited circulation of preliminary material. We anticipate that all of the papers will be revised and published in a formal outlet within the next year. Brent Swallow Hein Mallee World Agroforestry Centre International Development Research Centre Nairobi, Kenya Singapore

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Contents

1. Introduction 11

2. Evolution of conservation perspectives 18

3. The origins and development of market-based instruments for environmental policy 22

4. A conceptual model of compensation and reward for environmental services 27

4.1 Definitions and concepts 27

4.2 Identification and characterization of actors in compensation and rewards for environmental services 30

4.3 Definition and typology of compensation and rewards for environmental services 33

4.4 Graphical depiction of the basic conceptual framework 35

4.5 Characterization of mechanisms for compensation and rewards for environmental services 36

4.6 Characterization of the external environment and drivers 37

5. Public policy context, expectations and compensation and rewards for environmental services 38

6. Overview of CRES mechanisms and perspectives 42

7. Conclusions 47

References 50

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Acronyms

ACTS the African Centre for Technology Studies

BBOP Business and Biodiversity Offset Programme

CBD Convention on Biological Diversity

CES Compensation for environmental services

CGRR Corporación Grupo Randi Randi

CRES Compensation and rewards for environmental services

CSR Corporate Social Responsibility

ICDPs Integrated conservation and development projects

ICRAF World Agroforestry Centre

IDRC International Development Research Centre, Canada

ISEC Institute for Social and Economic Change, Bangalore, India

IUCN World Conservation Union

MA Millennium Ecosystem Assessment

NEPIs New Environmental Policy Instruments

PES Payment for environmental service

RES Rewards of environmental services

RPE Rural Poverty and Environment Programme

UNEP United Nations Environment Programme

UNFCCC UN Framework Convention on Climate Change

WWF Worldwide Fund for Nature

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1. Introduction

The importance of ecosystems to human societies has long been recognized for the production

of the many and varied ecosystems services upon which life is based. Ecosystems provide

products of direct value to people – food, fiber and fuel – and also an array of indirect benefits

– water filtration, climate regulation, nutrient cycling, pollination, pest control and disease

regulation – that support and promote the natural resource base upon which economic

activities are founded. Healthy ecosystems are particularly important to the rural poor of the

developing world, people who often live in very close connection to their natural surrounding.

While the rural poor tend to derive large portions of their livelihoods from terrestrial and

aquatic ecosystems, they also tend to be very vulnerable to deterioration in those ecosystems

and the services that those ecosystems provide. Despite the importance of ecosystem services

to poverty reduction, sustainable livelihoods and economic development, ecosystems and their

constituent goods and services continue to decline at alarming rates. The Millennium

Ecosystem Assessment (MA) (2005) has helped to clarify the linkages between ecosystems,

the benefits that people derive from those ecosystems, and human well-being, as well as the

magnitude and global nature of the degradation of ecosystems.

A major reason for the rapid decline in ecosystems is that many ecosystem services are not

priced or assigned value by the prevailing paradigms of production, exchange and regulation.

While there are markets for many of the ‘provisioning’ ecosystem services, there tend to be

very incomplete or missing markets for ‘regulating’, ‘supporting’ and ‘cultural’ services.

Reasons for market failure are well known to students of economics: many of these services

have the attributes of economic public goods or are highly influenced by environmental

externalities. Many cultural services have public good characteristics: they are non-rival in

consumption (meaning that one person’s consumption of the good does not affect another

person’s ability to consume the product) and non-excludible (impossible or very costly to

exclude free riders). On the other hand, many of the regulatory services of ecosystems, such as

water filtration, are highly influenced by positive or negative externalities: the behaviour of an

upland agro-processor affects the quality of water available to downstream residents.

Societies have devised a number of public policy instruments to cope with market failures.

Some of these instruments, particularly regulatory, property rights, and financial instruments,

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have been used for environmental governance for many years. Most of these instruments are

implemented in a top-down rigid manner, earning them the name ‘hard policy instruments’.

Over the last twenty to thirty years, a variety of new environmental policy instruments have

been devised and implemented. Most of these instruments are more flexible and subject to

negotiation, multi-stakeholder dialog, and based on market principles of efficiency, earning

them the names ‘soft policy instruments’ or ‘market-based instruments’. The following short

paragraphs provide a quick overview of these instruments. Later sections of the paper address

some of these in more detail.

Regulatory instruments have been a mainstay of the ‘command-and-control’ approach to

environmental management for many years, setting and enforcing uniform minimum standards

of technology or performance for all firms (Stavins 2002, p.1). Regulatory systems include

rules, systems to modify rules as needed, and mechanisms for their enforcement. Regulations

can be distinguished by what they proscribe: the use or non-use of specific technologies,

environmental outcomes from specific activities, or environmental outcomes from firms or

industries.

Property rights instruments have long been used by governments to pursue combinations of

economic, social and environmental objectives, including state ownership and management of

critical resources as well as systems to register and enforce more secure property rights for

individuals or groups. Conservation and environmental easements are property rights

instruments that are specifically designed to advance environmental policy objectives.

Conditional forestry co-management, in which communities or user groups gain conditional

limited rights to forests in exchange for following specific management plans, are another new

property rights instrument.

Communicative instruments use selective communication to persuade and advocate certain

types of behaviour. Public systems for extension of information about soil and water

conservation have been a mainstay of rural environmental management in the developing

world for many years. Public disclosure and shaming are often the main instruments available

to non-governmental organizations. Private firms invest heavily in advertising and often

undertake investments in public environmental management in order to be able to advertise

that they are good corporate citizens.

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Financial instruments use financial incentives to reduce environment-damaging activity or

enhance environment-friendly activity. Financial incentives include taxes and subsidies on

inputs, information, outputs or economic activity; fines on prohibited activity, and investments

in social or physical assets. Financial instruments with an environmental focus include

subsidies or tax relief for the use of clean technology and sharing of eco-tourism revenue with

communities impacting on protected areas.

Tradeable permit or credit systems establish limits or ‘caps’ on the allowable levels of total

resource use or pollution emissions, allocate permits or credits to portions of those caps, and

facilitate banking or trading of the permits. Cap-and-trade systems have been established to

manage water allocation and to limit water and air pollution. Trading in SO2 emissions in the

United States has been the largest cap-and-trade system, but now is being eclipsed by

international carbon dioxide trading schemes such as the European Union Emissions Trading

Scheme.

Voluntary environmental management systems such as the EU’s Environmental Management

and Audit system and the ISO14001 standards encourage industries to operate more

responsibly. These systems require firms to audit the environmental impacts of their

operations, establish internal audit systems to manage and minimize their impacts, and

regularly issue stakeholders with a report. Firms that participate in these schemes are given

logos by relevant authorities to use in their advertisements (Jordan, Wurzel and Breuckner

2003). There are multiple ways in which companies may recoup the benefits of following such

schemes: attracting consumers, investors or workers to their companies. They may also be able

to forestall or prepare their businesses for environmental regulations.

Eco-labelling is part of a larger trend, particularly in Europe, of ethical consumption, in which

consumers are provided with information about the production processes, returns to producers,

and environmental impacts of the products that they buy. The OECD recognizes three types of

eco-labels: (1) a Type 1 label refers to the environmental quality of the product compared to

the rest of the products, with a third-party certification scheme that is often government

supported; (2) a Type 2 label is a one-way communication from producers to consumers,

making a claim for the product; and (3) a Type 3 label uses pre-set indices and gives quantified

information about products that are independently verified (Gallastegui 2002). Tropical

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products most influenced by these mechanisms are forest products (Stringer 2006), coffee

(Muradian and Pelupessy 2005) and eco-tourism.

Environmental offset schemes are voluntary or mandatory arrangements in which firms,

industries or national governments offset unavoidable environmental damage in one location

with investments in environmental conservation in another location. Carbon and biodiversity

are the main focus of offset programmes at present. The Wetland Mitigation Banking

operating in the United States is an advanced model of an offset scheme.

Negotiated agreements between government and industry are very common in Europe and

becoming more common in developing countries as the environment agencies try to enact new

environmental laws (Jordan, Wurzel and Breuckner 2003).

Self-negotiated deals or facilitated agreements between ecosystem stewards and environmental

service beneficiaries1 are one of the newer contractual instruments, mostly involving water

utilities or large water users making conditional payments to upland farmers who maintain or

restore land cover consistent with good water quality. Latin America has been particularly

receptive to these mechanisms, with working mechanisms established in Costa Rica,

Colombia, Ecuador, Mexico, and other countries (Pagiola, Arcenas and Platais 2005).

The terms ‘payment for environmental services’ and ‘payment for ecosystem services’ have

been widely used to describe new types of flexible environmental policies, voluntary

agreements and contractual instruments that have emerged in the developing world over the

two last decades. Wunder (2005, p. 9) provided a narrow definition of payment for

environmental service as “a voluntary transaction where a well-defined environmental service

(or a land use likely to secure that service) is being bought by a (minimum one) buyer from a

(minimum one) seller, if and only if the environmental service provider secures the

environmental service provision”. Forest Trends considers a broader range of instruments as

payments for environmental services, including (1) public payment schemes to private land

and forest owners to maintain or enhance ecosystem services {a type of financial instrument};

1 Environmental service beneficiaries are a subset of all people who benefit from ecosystem services. That is, ecosystem service beneficiaries include people who benefit from the purely private goods (e.g. food crops) that ecosystems generate, and are exchanged in regular commodity markets. Environmental service beneficiaries benefit from non-provisioning services for which markets do not readily develop because of some combination of high exclusion costs, non-rivalrous consumption, or significant externality effects.

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(2) open trading between buyers and sellers under a regulatory cap or floor on the level of

ecosystem services to be provided {tradeable permit or credit systems}; (3) self-organized

private deals in which individual beneficiaries of ecosystem services contract directly with

providers of those services {self-negotiated deals}; and (4) eco-labeling of products that

assures buyers that production processes involved have a neutral or positive effect on

ecosystem services {eco-labelling}.

There are optimistic and pessimistic views of these attempts to harness market forces for

ecosystem management. Relatively conservative government agencies may see these flexible

institutions as a challenge to their hegemony and simpler systems of command-and-control.

Bell (2003) describes the failure of some new market instruments in the United States and

urges governments in developing countries to be realistic about the challenges and limitations

of using market instruments for environmental management. Pagiola et al. (2004) are among a

group of analysts who are optimistic about the potential of payments for ecosystem services to

contribute to ecosystem management, but feel that this function can be undermined if the same

mechanisms are expected to contribute to poverty reduction. While some conservation experts

see market-based mechanisms as a way to harness significant new investment in conservation

(Gutman 2003), others see the same mechanisms as the start of a thin edge of ‘selling nature’

(discussions during the Asia regional workshop). Experience from the Philippines and

Indonesia suggests that indigenous and disenfranchised local communities may be able to use

market-based mechanisms to maintain secure property rights to land and forest resources and

thus enhance their income streams (Rosales 2003). Many groups that advocate for those

communities, however, see payment for environmental service (PES) mechanisms as

undermining the rights and well-being of the poor. However, in their review of ‘PES-like’

schemes in Bolivia, Robertson and Wunder (2005) found some evidence that the schemes

were contributing to the well-being of poor people and no evidence of the schemes damaging

the poor. Overall, one might conceive of four extreme circumstances of tradeoff or

complementarity between environmental conservation and human well-being: (1) PES

mechanisms may lead to win-win solutions, with the environment conserved and the poor

made better off; (2) PES mechanisms may contribute to environmental conservation, but at the

expense of the poor who are reliant on those resources; (3) PES mechanisms may strengthen

the rights and well-being of the poor, but at the expense of ecosystem services that are most

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highly valued by the larger society; or (4) PES mechanisms may contribute to the continued

degradation of ecosystems, while undermining the rights and well-being of the poor.

This paper is the first in a series of nine related papers that review the state of the science and

practice of compensation and rewards for ecosystem services in the developing world. As

discussed in section 4 below, we use compensation and reward for ecosystem services to refer

to a range of mechanisms linking ecosystem stewards and environmental service beneficiaries,

including the mechanisms normally included under the term payment for ecosystem service.

This review has been undertaken to address key questions about the impact and future

prospects of compensation and rewards for ecosystem services, and the potential role of

research and policy engagement in helping to make these instruments more beneficial to the

poor in the urban and rural landscapes in the developing world. This introductory paper

reviews key concepts and perspectives that underlie the other papers. There are five other

papers in the series:

Issue Paper 1: Exploring the inter-linkages among and between compensation and rewards

for ecosystem services (CRES) and human well-being

Issue Paper 2: Criteria and indicators for environmental service compensation and reward

mechanisms: realistic, voluntary, conditional and pro-poor

Issue Paper 3: The conditions for effective mechanisms of compensation and reward for

environmental services

Issue Paper 4: Organization and governance for fostering pro-poor compensation and rewards

for environmental services

Issue Paper 5: How important will different types of CRES mechanisms be in shaping

poverty and ecosystem services across Africa, Asia and Latin America over the next two

decades?

This set of nine papers has been prepared as part of a Pan-Tropical Scoping Study of

Compensation and Rewards for Environmental Services for the Rural Poverty and

Environment Programme (RPE) of the International Development Research Centre (IDRC).

The papers have benefited from multiple inputs. First, an extensive review of the literature and

experience was undertaken, with emphasis on experience in Latin America, Africa and Asia,

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recognizing that experience in those regions has often been motivated by experiences in North

America or Europe.2 Second, all of the organizations involved in the scoping study have

previous experience in various aspects of compensation and rewards for ecosystem services.3

Third, the authors of the papers participated in, and have access to the proceedings from,

regional workshops held in Latin America, Asia and Africa in April and May of 2006.4 Fourth,

drafts of all papers were presented and discussed during the regional workshops and the

author’s writeshop convened in June 2006 in Nairobi, Kenya. The concepts and frameworks

presented in this paper were presented and discussed at all of the previous workshops, in

subsequent discussions among the broader research team, and at a meeting of the IDRC RPE

group in Bali, Indonesia in June 2006.

The remainder of this paper proceeds as follows. Section 2 presents a review of the experience

with conservation, largely in the developing world, in which compensation and rewards for

ecosystem services have come to be viewed from two perspectives: as sources of conservation

finance and as instruments that can make environmental conservation compatible with poverty

reduction. Section 3 is a review of the experience with new market instruments for

environmental policy, showing how those largely began in North America and Europe and

have expanded over time from flexible mechanisms for compensation for ecosystem damage,

to now include compulsory and voluntary mechanisms of reward for ecosystem stewardship

and restoration. There has also been some expansion of the mechanisms over space, from

Europe and North America to Latin America, Asia and Africa. Section 4 picks up and expands

upon three of the themes from section 3, structured by a conceptual model of ecosystem

services, ecosystem stewards, environmental service beneficiaries and intermediaries. One of

the themes is the importance of distinguishing between compensation for ecosystem damage

versus rewards for ecosystem stewardship and restoration. Section 5 explores the linkages

between compensation and rewards for ecosystem services and the wider public policy and

2 The primary geographic scope of this scoping study is given by the geographic focus of the RPE programme: the Nile Basin, south-eastern Africa, Sahel, Central Andes, Amazonia, Western Caribbean and Central America, Mekong Delta, China, and South Asia. The RPE programme also includes North Africa and West Asia.

3 The Scoping Study is financed by the International Development Research Centre and coordinated by the World Agroforestry Centre. Partners in the study included the World Conservation Union (IUCN), Forest Trends, the Division for Environmental Conventions of the United Nations Environment Program, Corporación Grupo Randi Randi (Ecuador), the African Centre for Technology Studies, the Institute for Social and Economic Change (India).

4 Summary reports on the regional workshops have been prepared by Poats (Latin America), Raju et al. (Asia) and Ochieng, Otiende and Rumley (Africa).

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social context within which ecosystem stewards, beneficiaries and intermediaries interact.

Section 6 presents an overview of the current situation of CRES in developing countries, while

Section 7 presents a number of conclusions.

2. Evolution of conservation perspectives

An early conservation approach can be termed the wilderness conservation approach, with

roots in the 19th century European approach to forest management. This approach invoked

environmental conservation as a rationale for excluding common people from forests, mostly

to the benefit of wealthy forest concessionaires. In the developing world, the wilderness

conservation approach had greatest influence in southeast Asia where upland areas were

declared as forest estates where human settlement should be severely limited. Seventy percent

of Indonesia continues to be managed as state forest estate, despite the fact that some 50

million people now live in those areas; many areas were deforested decades ago, and many

other areas high tree cover actually managed as agroforests by local populations (Fay and

Michon 2003).

The protected area approach became the backbone of the western conservation movement in

the 20th century. From a conservation perspective, this approach symbolically proposed the

building of a new Ark, isolating and protecting designated areas and species from surrounding

areas of human impact. The fundamental understanding underlying this approach was that

growth of human populations and economic activity is invariably destructive to the

environment, and therefore there is a need to protect areas of acute stress through managerial

or legal means. The wilderness conservation perspective may have motivated most of the best

known of the early environmental organizations such as the IUCN, WWF and the Sierra Club.

In the United States, this led to the establishment of the National Parks system, which

continues to inspire the parks approach to conservation across the world. The wilderness

conservation perspective also underpinned the Biosphere Reserve approach of UNESCO’s

Man and Biosphere programme. Biosphere reserves usually consists of three concentric rings,

which include an inner ring or core conservation area, a middle ring most often referred to as

the buffer zone, and a third ring or transition zone where various degrees of human activity

occur (Martino 2001). Park creation involved the removal of people from parks and their

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resettlement outside of the park boundaries in the transition or buffer zone. Access to the park

was largely restricted to local community members, managed by a system of ‘fences and

fines’, and preserved mostly for consumption by tourists. Communities have rarely been

compensated adequately for the loss of their land. As a result, poor rural populations have been

put at further risk by reduction of production capacity, decreased income, and uncertain land

tenure (Neumann 1996; Peluso 1993). To date, the Man and Biosphere program is host to 368

biosphere reserves in 91 countries, and the list continues to grow. The parks approach

continues to be the main approach to conservation across the world, with 11.5% of the earth’s

land area now designated as some type of conservation reserve (Chape et al. 2003). While the

wildness conservation perspective has been scrupulously followed in many parts of the

developing world, it often has been criticized as quintessentially Northern in orientation,

inconsistent and insensitive to the values and practices of people in other parts of the world

where it has been applied (Holdgate 1999). There are many people in the conservation

community who still ardently defend the protected area approach.

In light of rising concerns about chemical pollution, hazardous waste and human dependence

on non-renewable resources, the Club of Rome Report of the 1970s continued to espouse the

perspective that economic development is harmful to the environment. Rather than advocating

the protection of isolated regions or species, the Club of Rome Report called for a fundamental

change in behavior and values, and especially a slowdown or reversal in the rate of economic

and demographic change. Nonetheless, the orthodox approach of establishing protected areas

to concentrate attention on areas of acute stress and to try to protect them through managerial

or legal means still prevailed. Many conservation organizations and professionals continue to

stress the importance of the parks approach.

It was not until the formation of the concept of Sustainable Development – introduced by

IUCN, WWF and UNEP in the World Conservation Strategy (IUCN et al. 1980) – that the

approach to conservation began to slowly but fundamentally change. The underlying idea

espoused was that it was possible to harmonize the objectives of economic development and

conservation through the choice of appropriate policies and market-based instruments. More

specifically, it was recognized that the natural resource base was inextricably linked to the

prospects of economic development, and that it was possible to achieve economic

19

development and conservation simultaneously by addressing the underlying causes of natural

resource degradation.

With the advent of the Brundlandt Commission report in 1987 (WCED 1987), conservation

approaches faced another apparent dilemma. For the first time at the global level, an

inextricable link between poverty and environment was revealed and highlighted. The

Brundlandt report states that:

“Poverty is a major cause and effect of global environmental problems”

“Many parts of the world are caught in a vicious downwards spiral: poor people are forced to overuse environmental resources to survive from day to day, and their impoverishment of their environment further impoverishes them, making their survival more difficult and uncertain” (WCED 1987; p. 3).

The Brundlandt report, while bringing to the forefront an important perceived relationship,

nevertheless painted a pessimistic picture of poverty - environment interactions, reflecting the

image of a vicious downward spiral of need. The orthodox conservation approach latched onto

this relationship and accordingly advocated that demographic and economic changes were

contributing to this process. The basic idea was that rapid change occurring in ecologically

vulnerable urban or rural areas ‘poverty reserves’ had the greatest environmental implications.

The solutions offered were directed at macroeconomic poverty eradication measures and the

continuation of short-term land management or protection schemes excluding certain land uses

while seeking to protect fragile ecosystems from encroachment by poor people.

Such top-down and exclusionary approaches to poverty reduction and environmental

protection ultimately met severe criticism both for failing to meet local livelihood needs and

failing to protect natural resources. The approach did not take proper account of the political

economy of power and use of resources whereby the rich and powerful were able to use

natural resources for unsustainable activities at very low rents thereby leading ecosystem

declines which in turn pushed many social groups dependent on the ecosystems into poverty

(Duraiappah 1998). The Rio Earth Summit in 1992 began a movement toward more localized,

community-based approaches to natural resource management and sustainable development, a

movement that was at least partially slowed by Indira Ghandi’s infamous statement that

poverty is the main driver of environmental degradation.

20

It can be argued that the emphasis on community-based approaches stemmed from a

distinctively Southern conservation approach of what Guha (1989) calls the poor peoples’

conservation movements. As exemplified by the famous Chipko movement in India, this

approach sees the environment-poverty relationship running in the opposite direction, with

environmental degradation seen as inimical to the prospects of socio-economic progress and

poverty reduction. At the heart of this approach has been a political conception of

environmental degradation, stemming from the unequal distribution of political and

communicative power. As a result, the solution that is advocated is primarily in terms of

empowerment and collective action.

As a result of the sustainable development ethos, the approach to conservation sees the

simultaneous pursuit of economic prosperity, poverty reduction and environmental

conservation to be not only possible but also necessary. Under this approach, two major

strands are visible. One strand lays major emphasis on community-based approaches, which

seek to create and strengthen institutions that can make the pursuit of economic prosperity,

poverty reduction and conservation possible. The approach builds on some innovative work on

poverty reduction that concentrates attention on the building of social capital among

stakeholders (Putnam 2000). Behind this approach is an alternative conception of poverty that

places central emphasis on uncertainty, vulnerability and shocks as well as the ability of poor

people to adapt and cope to changes (Narayan et al. 2000). The second strand, as highlighted

in article 11 of the Convention on Biological Diversity (CBD) calls upon the CBD parties to

“... as far as possible and as appropriate, adopt economically and socially sound measures

that act as incentives for the conservation and sustainable use of components of biological

diversity” (http://www.biodiv.org/convention/articles.shtml?a=cbd-11)

Integrated conservation and development projects (ICDPs) emerged as an alternative to the

fines and fences approach in the late 1970s. The Worldwide Fund for Nature (WWF) and

World Bank supported ICDPs around the developing world. ICDPs were designed to

simultaneously advance three goals of sustainable development: (i) more effective biodiversity

conservation; (ii) increased community participation in conservation and development; and

(iii) economic opportunities for the rural poor (Wells et al. 1999). However it is generally

acknowledged that the results of increased conservation and economic development have been

mixed (WWF 2000, 2001; Oates 1999). Some examples of successful community-based

21

conservation schemes have been noted across the developing world. On the whole, however,

the schemes have often been difficult to sustain in financial terms and their conservation

impact have rarely matched expectations because of the inability to decrease demand for

ecosystem services.

The emerging lessons and motivations towards direct approaches to conservation point to the

fact that ecosystem conservation requires a steady stream of financial resources that is

adequate not just to cover the direct costs of ecosystem management, but also to offset the

opportunity costs that conservation incurs at the local level. The opportunity costs incurred at

the local level shape the economic incentives for the conservation effort. Unlike traditional

conservation approaches, payment for environmental services therefore revolves around direct

payment for services provided and received, rather than on a system of indirect benefits or

‘conservation subsidies’ which are injected from outside, and which have often proved

unreliable or unsustainable over the long term (Ferraro and Kiss 2002).

3. The origins and development of market-based instruments for environmental policy

The theory behind market-based approaches to environmental policy was first developed in the

1960s by Dales (1968) and Crocker (1966). These economists proposed cap-and-trade systems

to manage pollution in which limited amounts of rights to pollute or use natural resources

would be distributed to stakeholders, then could be bought and sold. Firms with lower

pollution abatement costs would be able to sell emission permits to firms with higher

abatement costs. Compared to the blanket application of fixed standards, these flexible

mechanisms would meet the same emission standards at lower total cost to the economy

(Woodward 2005).

The US Environmental Protection Agency began to experiment with emission credits in 1974,

allowing firms to earn credits by surpassing emission targets for CO, SO2 and NOx in one part

of their firm that could be applied to higher emissions in other parts of the same firm. The

emission offset program began in 1977, for the first time allowing firms to trade emission

credits with other firms and to bank credits for future use. These instruments were codified in

the Emission Trading Programme in 1986. Greater impetus for the use of market-based

22

instruments came in 1988 when Senators Timothy Wirth and John Heinz led the

environmental policy initiative, Project 88: Harnessing Market Forces to Protect our

Environment. A number of other emission trading regimes were initiated in the United States

in the 1980s and 1990s. By 2001, the United States Environmental Protection Agency was

actively involved in the design or implementation of 35 emission trading projects across the

United States. The largest and perhaps most successful emission trading regimes in the United

States were the lead trading regime that gave gasoline manufacturers greatly flexibility in

meeting lead content regulations, and the SO2 allowance trading regime for acid rain control

(Stavins 2000, 2002). It has been estimated that the SO2 trading regime has resulted in average

cost savings of US$1 billion per year, compared to the command-and-control approaches that

were considered by the US Congress (Stavins 2005). In 2004 there were about 70 water

quality trading initiatives in the United States (King 2005).

US schemes for Wetlands Mitigation Banking are an example of what is called ‘biodiversity

offsets’. Concerns over continued loss of wetlands led to the articulation of a national goal of

no net loss of wetlands and the environmental services that they provide. The US Army Corps

of Engineers requires that project developers who fill in wetlands mitigate their impacts as

much as possible. If full mitigation is not possible, then the developers are able to offset

damage to one wetland with the conservation or rehabilitation of another wetland. Single-user

wetland mitigation allows project developers to bank up credits from wetland restoration in

one area that can later be drawn upon to offset damage in other areas. Commercial wetland

mitigation banks allow the development of a market in wetland restoration, with

environmental consulting firms restoring wetlands and selling the wetland offsets to project

developers as the need arises. Despite its obvious theoretical advantages, only about 10-20%

of all wetland banking schemes take the form of commercial banks (Shabman and Scodari

2005). Operating in a broader variety of ecosystems and countries, the Business and

Biodiversity Offset Programme (BBOP) encourages businesses that cause unavoidable damage

to biodiversity to voluntarily offset those impacts by making corresponding investments in

biodiversity conservation (www.forest-trends.org/biodiversityoffsetprogram/).

Until the late 1980s, environmental policy in Europe followed the standard command-and-

control approach, with little harmonization between countries. The year 1992 marked a

watershed in environmental policy in Europe, after which there has been considerable

23

experimentation with more flexible policy instruments. Jordan, Wurzel and Zito (2005)

describe four types of New Environmental Policy Instruments (NEPIs) that have emerged over

the last 15 years: (1) Market-based instruments, including eco-taxes, tradeable permit systems,

subsidies and deposit-refund schemes; (2) eco-labels – including those that are externally-

verified, unverified self-declaratory schemes, and single-issue schemes; (3) voluntary

environmental management and business certification systems; and (4) voluntary agreements

between industry and public authorities on the achievement of environmental objectives,

including negotiated agreements, public voluntary schemes, and unilateral commitments.

A study of environmental policy in 7 European countries, the European Union as a whole, plus

Australia, shows large variation in approach from jurisdiction to jurisdiction. Eco-taxes are

most common in Finland and the Netherlands, tradable permits common only in the UK,

voluntary agreements most common in Germany and the Netherlands, eco-labels most

common in Germany and Finland, and environmental management systems common in

Finland, Germany and Austria. Countries such as Finland, Germany, the Netherlands and

Austria have been much more innovative in adopting New Environmental Policy Instruments

than countries such as Ireland, France and Australia (Jordan et al. 2003, Table 1).

Table 1. The distribution of new policy instruments in 9 jurisdictions of Europe and Australia

Eco-taxes Permits Agreements Eco-labels Systems

Finland High Low Medium High High

Germany Medium Low High High High

Netherlands High High High Low Medium

Austria Medium Low Medium Medium High

UK Medium High Low/Medium Low Low/Medium

Ireland Low Low Low/Medium Low Medium

European Union Low Low/Medium Medium Medium Medium

France Medium Low Low Low Low

Australia Low Low Low Low Medium

Source: Jordan et. al. 2003.

Environmental policy in the developing world still relies primarily on command-and-control

policy instruments, some of which are a legacy of colonial governance systems. For example,

forestry policy in many parts of Africa and Asia is a hold-over of European forest laws that

justified the exclusion of peasant farmers from large tracts of land on the basis of arguments

about the environmental services of forest ecosystems. Harsh enforcement of soil and water

24

conservation laws by the colonial governments fueled resentment of the colonial governments.

The post-colonial period was a time of resistance against the colonial laws, with significant

conflict in countries such as Indonesia and weak enforcement in countries like Kenya. The Rio

Summit of 1992 brought about a new phase of environmental regulation in many developing

countries, with under-resourced Environmental Management Authorities still largely relying

on command-and-control policies, despite the remaining challenges of enforcing such policies.

The Rio environmental conventions on biodiversity, climate change and desertification

mandated the parties to develop national-level laws and strategies consistent with the

objectives of the conventions, with only one of those conventions, the UN Framework

Convention on Climate Change (UNFCCC), providing the possibility for market-based policy

instruments.

Di Leva (2002) describes 3 categories of market-based instruments that have made significant

inroads in developing countries: (1) traditional revenue-raising measures adjusted to

environmental concerns; (2) real property measures adjusted to conservation needs, such as

conservation easements; and (3) protection through a variety of more recent legal instruments,

such as carbon sequestration under the Kyoto Protocol and transferable quotas. Ecotourism is

the main example of the first category of instruments, with up to 20 percent of tourism to the

Asia / Pacific region being linked to nature holidays. Ecotourism can provide conservation

incentives to rural communities in two ways, through the sharing of revenue generated from

user fees with communities surrounding protected areas that attract tourists, and through

community-owned or community-managed ecotourism facilities. The regional workshops for

Latin America and Africa revealed that many countries in Latin America and Africa have

accumulated significant experience with such mechanisms. In East and Southern Africa, there

are a growing number of communities involved in ecotourism, contributing to the conservation

of significant tracts of savannah grassland. The Community Conservancies of Namibia are

perhaps the most obvious success story. Fees for bio-prospecting attracted a great deal of

attention during the formulation of the Convention on Biological Diversity. While there are a

few high profile bio-prospecting arrangements involving the payment of significant amounts

of money by private firms, the overall amounts involved across the developing world remain

miniscule.

25

Although attracting the greatest attention by analysts at the moment, there still are relatively

few cases of self-organized deals in which the beneficiaries of environmental services pay

ecosystem stewards to maintain the quality of environmental services. Since 1997, the City of

New York has invested US$1.5 billion in conservation of the Catskills / Delaware catchment,

which is the major source of water for the city. In exchange farmers, businesses and local

governments in the catchment area have agreed to undertake a range of conservation activities

and foregone development opportunities. Similar mechanisms are now in place in several

locations in Latin America and Asia, and there is considerable interest in East and Southern

Africa in instituting similar arrangements (see regional workshop reports for Latin America -

ICRAF Working Paper no. 33, Africa - ICRAF Working Paper no. 35 and Asia - ICRAF

Working Paper no. 34).

Utting (2005) notes that these various changes in the environmental policy environment over

the last 20 years are part of an overall trend toward ‘re-regulation’, where rolling back the role

of the state and liberalization of markets have been accompanied by the strengthening of

governmental and intergovernmental rules to protect, for example, certain types of property

rights, international trade and investment, and the environment. Corporate Social

Responsibility (CSR) has been increasingly important since the late 1990s, with companies

increasingly being held accountable by non-governmental organizations and public-private

partnerships, practicing so-called civil regulation or co-regulation. These ‘collective’ or more

‘socialized’ forms of private authority (O’Rourke 2003) are increasingly supported by

governments and intergovernmental organizations. While most of this change in the corporate

regulatory environment is occurring in Europe and North America, there are both positive and

negative spillover effects to developing countries. For example, concern about the carbon

emissions associated with air transport of flowers from Africa to Europe could jeopardize one

of the few sources of foreign exchange and vibrant economic growth in Kenya (Daily Nation,

Feb 18, 2007).

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4. A conceptual model of compensation and reward for environmental services

4.1 Definitions and concepts

A variety of terms are used in the academic and empirical literature to describe new market

instruments for environmental policy. Some analysts see the terms as describing distinct

concepts, while other analysts use terms relatively inter-changeably. Motivated by the review

presented in Section 3, this section seeks to clarify some of these key terms, structured around

a simple conceptual framework.

Two important terms are environmental services and ecosystem services. Environmental

services is a term widely commonly used in the engineering profession to refer to the

professional services that engineers provide to mitigate environmental damage. The

Environmental Services Association, for example, “represents the UK’s waste management

and secondary resources industry”, http://www.esauk.org/, while Golder Associates is a large

international consulting firm specializing in “ground engineering and environmental services”.

http://www.golder.com/ default.asp?PID =1&LID=1. However, in this paper we ascribe to the

environmental economist’s concept of environmental service as a positive benefit that people

obtain from the environment. That is, an environmental service is generated when an economic

activity in one place, controlled by one economic agent, has positive spillover effects on other

consumers or producers, often in other places. The environmental services of good forest

management, for example, are usually categorized into watershed protection, biodiversity

conservation, atmospheric regulation (including greenhouse gas mitigation), and landscape

beauty (e.g. Pagiola, Bishop and Landell-Mills, 2002). Analysts such as Scherr and McNeely

(2003) and Daily, Ehrlich and Sánchez-Azofeifa (2001) have noted that human-dominated

landscapes can also generate important levels of environmental services. The ASB Partnership

for the Humid Forest Margins has shown that human-dominated landscapes in the humid

tropics are associated with a wide range of environmental services, with multi-strata

agroforestry systems generating much higher levels of environmental services than secondary

forests or forest plantations, although clearly lower than primary forests (Tomich, Thomas and

Van Noordwijk 2004).

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The concept of ecosystem services has been in common use for some decades, developed and

applied jointly by economists and ecologists. The concept remains somewhat elusive and, in

some circles, controversial. In the year 2000, the Ecological Society of America produced a

primer on ecosystem services that defined ecosystem services as “the processes by which the

environment produces resources that we often take for granted such as clean water, timber, and

habitat for fisheries, and pollination of native and agricultural plants”

(http://www.actionbioscience.org/environment/ esa.html). This is the definition which is used

by Wikipedia. It contrasts considerably with the definition used by the Millennium Ecosystem

Assessment (MA) which defines an ecosystem as a dynamic complex of plant, animal and

microorganism communities and the nonliving environment acting as a functional unit and

ecosystem services as “… the benefits people obtain from ecosystems. These include

provisioning services such as food and water; regulating services such as regulation of floods,

drought, land degradation, and disease; supporting services such as soil formation and

nutrient cycling; and cultural services such as recreational, spiritual, religious and other

nonmaterial benefit” (MA, Chapter 1, Conceptual Framework, p.27). The Millennium

Ecosystem Assessment definition focuses on outputs, rather than processes, and it considers a

much broader range of outputs, especially provisioning outputs, than does the Ecological

Society of America definition. In this paper, we ascribe to the Millennium Ecosystem

Assessment definition of ecosystem services, although we note that market-based instruments

are generally much more effective for provisioning services than for regulating, supporting or

cultural services. It is worth noting that the concept of ecosystem services is still controversial

in discussions of environmental policy, with the concept basically rejected during recent

discussions of the Conference of Parties to the Ramsar Convention and the delegates to the

United Nations Forum on Forests. Table 2 presents a categorization of provisioning, regulating

and cultural services, as well as the types of values that they represent. Supporting services

underpin the other types of services.

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Table 2. A typology of ecosystem services

Types of ecosystem service

Provisioning services reflect goods and services produced in the ecosystem

Regulating services result from the capacity of ecosystems to regulate climate, hydrological and bio-chemical cycles, earth surface processes, and a variety of biological processes

Cultural services relate to the benefits people obtain from ecosystems through recreation, cognitive development, relaxation, and spiritual reflection.

Specific ecosystem services

Food, fodder, fuel (wood and dung), timber, fibers, other raw materials, biochemical and medicinal resources, genetic resources, ornamentals

Carbon sequestration; climate regulation through regulation of albedo, temperature and rainfall patterns; regulation of the timing and volume of river and ground water flows; protection against floods by coastal or riparian systems; regulation of erosion and sedimentation; regulation of species reproduction (nursery function); breakdown of excess nutrients and pollution; pollination; regulation of pests and pathogens; protection against storms; protection against noise and dust; and biological nitrogen fixation

Nature and biodiversity (provision of a habitat for wild plant and animal species); provision of cultural, historical and religious heritage (e.g. a historical landscape or a sacred forests); provision of scientific and educational information; provision of opportunities for recreation and tourism; provision of attractive landscape features enhancing housing and living conditions (amenity service); provision of other information (e.g. cultural or artistic inspiration)

Types of value

Direct use value

Option values

Indirect use values

Option values

Direct use value

Non-use values

Source: Hein et al. 2006 (based on Ehrlich and Ehrlich 1981; Costanza et al. 1997; De Groot et al. 2002; Millennium Ecosystem

Assessment 2003.)

In practice, the main difference between ecosystem services and environmental services is the

inclusion or exclusion of provisioning ecosystem services. Almost all provisioning ecosystem

services – food, fiber, timber – are excludable and rivalrous, goods for which markets develop

most readily. The focus in this paper is on non-provisioning services – especially regulatory

and cultural services – for which markets do not easily develop because of high exclusion

costs, non-rivalrous consumption, or significant externality effects.

In a 2005 publication, Sven Wunder noted that there was no agreed definition of ‘payment for

environmental service (PES)’, despite its common use in the literature. He proposed the

following definition, “a voluntary, conditional transaction where at least one buyer pays at

least one seller for maintaining or adopting sustainable land management practices that

favour the provision of a well-defined environmental service” (Wunder 2005). While this

definition has been generally accepted by the international experts working on market-based

instruments for environmental policy, it also is controversial. Wunder himself has shown that

29

the definition rules out most market-based instruments in use in the developing world,

adopting PES-like as a more inclusive and flexible term in more recent publications.

In this project we do not challenge the Wunder definition of PES per se, but do doubt its

usefulness for describing and analyzing the range of interesting and important mechanisms

that are being negotiated for managing interactions between people with diverse interests in

ecosystem management and ecosystem services. In particular, we note that the relationships

between ecosystem stewards, environmental service beneficiaries and intermediaries may be

more complex than a simple transaction, with agreements that are not wholly voluntary and

payments that are not wholly conditional. Rather than offering an alternative definition of

payments for environmental services, we develop a conceptual framework that illustrates

different types of relationships between stewards, beneficiaries and intermediaries.5 We

suggest that the term compensation and rewards for environmental services (CRES) captures

most relationships. Later in this section, we offer definitions for these terms.

4.2 Identification and characterization of actors in compensation and rewards for environmental services

We can identify three generic types of stakeholders or functional groups in compensation and

rewards for environmental services: ecosystem stewards, environmental service beneficiaries,

and intermediaries. While we tend to refer to these as distinct groups of people or agents

operating within and dependent on an ecosystem, it is important to keep in mind that there may

be ecosystem stewards, environmental service beneficiaries and intermediaries within the same

village or family. Indeed, individual persons, communities or corporations may simultaneously

be ecosystem service stewards/modifiers, beneficiaries and intermediaries.

An ecosystem steward is an entity (individual, family, group, community) whose actions

modify the quantity or quality of ecosystem services available to environmental service

beneficiaries. We call them stewards in this framework to recognize that such entities are

recognized by society as having the right to interact closely with an ecosystem, provided that

they accept certain limitations on those rights and certain obligations to maintain the

5 This framework builds upon the framework presented in Tomich et al. 2004.

30

ecosystem. Experience shows that there are several important characteristics of ecosystem

stewards and their relationships with the ecosystem and other actors:

a. Exclusion or inclusion criteria. What criteria are implicitly or explicitly used to define who

is in and out of the different groups of ecosystem stewards (ethnicity, gender, ability to

pay, residential location, political power)?

b. Type and strength of groups and other forms of social organization, including their social

and political capital;

c. Nature of the cause-effect relationship between ecosystem stewards and the ecosystem.

What technologies, land use practices or enterprises are associated with benign or

destructive use of the ecosystem? What geographic locations within the ecosystem are

particularly important for ecosystem structure and function and what are the threats and

pressures on those locations? What technologies, land use practices or enterprises might be

promoted or actively discouraged with the ecosystem stewards to better conserve or

enhance the ecosystem? How fast or slow are the relationships – do they act over minutes,

days or decades? Are the relationships relatively linear, non-linear or subject to

thresholds?

d. Location vis-à-vis the ecosystem – e.g. upstream, midstream or downstream within a

watershed; adjacent to or relatively distant from a protected area or wetland; located within

or outside of an ecosystem;

e. Their rights and discretion over the way the ecosystem is used and managed and over the

design of mechanisms that shape overall management and use of the ecosystem;

f. Their level of human well-being, poverty and deprivation – both in absolute terms and

relative to other actors affecting the ecosystem;

g. Their demographic composition – in terms of gender, ethnicity, age and livelihood

strategies;

Environmental service beneficiaries are entities (individuals, families, groups, corporations,

towns, utility companies) who benefit from the environmental services generated by an

ecosystem. Environmental service beneficiaries can be characterized by:

31

a. Types of environmental and other ecosystem services they benefit from – see Table 2 for

the full list of ecosystem services;

b. Location – physical location within or outside of the ecosystem, within or outside of the

administrative area or country where the ecosystem is located;

c. Degree and type of dependence on the environmental service – for subsistence or

commercial exploitation;

d. Access to alternative supplies of the environmental services or good substitutes for those

services – for example environmental service beneficiaries who rely only on the regulating

service of Certified (carbon) Emission Reductions are likely to be able to draw upon a

much wider range of alternative suppliers than those who rely on the environmental

service of flood mitigation;

e. Level and trend in different dimensions of human well-being / deprivation;

f. Strength and type of property rights or entitlements to the environmental service;

g. Discretion over the way the ecosystem is used and managed;

h. Demographic composition – gender, ethnicity, age and occupation;

i. Type and strength of groups and other forms of social organization;

j. Their action resources 6 viz. the environmental services and their relations with others.

Intermediaries are entities (public authorities, non-governmental organizations, community- or

faith-based organizations, projects) that directly or indirectly shape interactions among

ecosystem stewards, environmental service beneficiaries, and the ecosystem itself. Ecosystem

service intermediaries perform a variety of roles in compensation and rewards for

environmental services, including providing information relevant to design, monitoring and

evaluation of contracts and negotiated agreements, providing a forum for negotiations,

enforcing the terms of regulations and contracts, and offsetting the transaction costs of

establishing and maintaining a working mechanism. Intermediaries can be characterized by:

6 Action resources include intangible and tangible assets that give actors the capability for agency – the ability to

exercise choices, to participate in collective action at various levels, or to influence other actors' choices. All forms of

assets – natural, physical, financial, human, and social capital – can be action resources (Ostrom 2007; Swallow et al.

2007).

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a. Mandate, objectives and perspectives – The intermediaries currently involved in CRES

mechanisms vary greatly in terms of mandate and objectives, from international

conservation organizations, international and national research organizations, local

governments, philanthropists, international development assistance organizations, state

and local arms of government.

b. Representation – Some intermediaries act on behalf of ecosystem stewards, environmental

service beneficiaries, or third parties with interest in the ecosystem or people living in the

ecosystem;

c. Source of authority – international convention, national law or policy, customary laws,

local practice, control over financial or physical resources, ownership or direct financial

interest in resource use, influence over the behavior of other authorities;

d. Type of influence on the behavior of ecosystem stewards and environmental service

beneficiaries – imposition and / or enforcement of regulations on resource use;

subsidization of the costs of establishing or maintaining an environmental management

regime; subsidization or provision of positive incentives.

4.3 Definition and typology of compensation and rewards for environmental services

Experts working on the area of payments and rewards for ecosystem services generally

characterize the contracts and agreements by two criteria: a) the type of ecosystem or

environmental service – usually landscape beauty, biodiversity conservation, watershed

protection and carbon sequestration; and b) type of contractual arrangement – usually a) self-

organized deals, b) open-trading schemes under cap-and-trade systems, c) payments made to

ecosystem stewards by public agencies or philanthropic organizations, and d) ecolabelling or

certification of products generated in ways that are consistent with good ecosystem

stewardship (see e.g. Jenkins 2006). In this section of the paper we recognize the salience of

this typification, but strengthen the focus on the different stakeholder groups and the type of

behavior that the compensation or rewards attempts to modify or offset. Reference to the four

types of contractual arrangement, and others, are made.

We define the term, Compensation and Rewards for Environmental Services (CRES) as

follows: contractual arrangements and negotiated agreements among ecosystem stewards,

33

environmental service beneficiaries and / or intermediaries, for the purpose of enhancing,

maintaining, re-allocating or offsetting damage to environmental services.

A particular CRES contract or negotiated agreement will include a compensation or reward

instrument or combination of instruments. We thus need to define the terms compensation for

environmental services (CES) and rewards of environmental services (RES):

Compensation for environmental services (CES) are payments or other forms of restitution

made to economic service beneficiaries or ecosystem stewards to offset foregone entitlements

to environmental services or ecosystem stewardship benefits.

Rewards of Environmental Services (RES) are inducements provided to ecosystem stewards to

enhance or continue to maintain environmental services.

Further distinction among CRES mechanisms is useful to clarify the agents involved, the

action that is being rewarded, and the nature of the contractual arrangement or negotiated

agreement. We distinguish two types of compensation (CES1 and CES2) and two types of

reward mechanisms (RES1 and RES2), as depicted graphically in Figure 1.

CES1 – Compensation to environmental service beneficiaries for socially-disappointing

damage to environmental services by ecosystem stewards. CES1 includes self-organized deals

between stewards and beneficiaries, restitution payments that are mandated or ordered by

intermediary organizations, as well as compensation payments made by an intermediary

organization. CES1 aligns with the principle of ‘polluter pay’.

CES2 – Self-organized contracts, negotiated agreements or tradable allowance and permit

systems that facilitate exchange of environmental service entitlements among environmental

service beneficiaries. This includes cap-and-trade systems for emissions and conservation

concessions.

RES1 – Rewards to ecosystem stewards for foregone stewardship rights or threat reduction.

RES1 includes self-organized deals between ecosystem stewards and environmental service

beneficiaries, public programmes of reward made on behalf of beneficiaries and eco-labeling

and certification schemes for products generated through good stewardship practices.

Examples include farmers being rewarded for not scaring migratory birds away from their

crops. It would also include rewards to farmers who adopt zero-grazing for their cattle as a

34

substitute for grazing and watering cattle in riparian areas. And it would include the

construction of a water point for a village to reduce use of a water point located inside of a

biodiversity conservation area.

RES2 – Rewards to ecosystem stewards for undertaking extra investments or management

practices that restore or enhance the ecosystem. This includes self-organized deals and public

programmes of reward. This would include, for example, support to the planting of indigenous

trees that provide greater habitat value for threatened birds.

Van Noordwijk et al. (this series) identify and discuss four key attributes of CRES

mechanisms – realistic, conditional, voluntary and pro-poor.

4.4 Graphical depiction of the basic conceptual framework

Figure 1 is a graphical representation of the concepts presented in this section of the paper.

The upper left bubbles represent the ecosystem – with ecosystem structure and function

transformed by an ecological production function into ecosystem services. Environmental

service beneficiaries benefit from environmental services, either directly or through some

value or market chain. They may or may not interact with two other stakeholder groups:

ecosystem stewards and intermediaries. Ecosystem stewards interact directly with the

ecosystem, with three types of effects on the ecosystem: use or extraction of ecosystem

resources; conservation and protection of the ecosystem; and investment and management to

enhance the ecosystem. The solid lines joining the boxes show direct relationships. The four

types of compensation and rewards for ecosystem services are indicated, with dashed lines

showing transfers of resources.

35

Figure 1. Illustration of key concepts and types of compensation and rewards for environmental services.

4.5 Characterization of mechanisms for compensation and rewards for environmental services

Experience shows that mechanisms of compensation and rewards for environmental services

can be characterized in several respects in addition to the stakeholder characteristics discussed

in Section 4.2 and the typology presented in section 4.3. These characteristics affect the

performance of the mechanism in terms of ecosystem management and impacts on poverty and

human well-being.

Relationships among ecosystem stewards, environmental service beneficiaries and

intermediaries. What is the nature of previous and confounding relations between ecosystem

stewards, environmental service beneficiaries, and intermediaries? Are there any lingering

conflicts that hamper fair negotiation and enforcement? Is the mechanism the only contractual

or negotiated relationship among the parties, or is this part of a multi-stranded social,

economic and / or political relationship? Do the other strands hamper or hinder the likelihood

of success of a new agreement?

Ecosystem Service

Beneficiaries

Ecosystem Service

Intermediaries

Ecosystem Structure & Function

Ecosystem Services

RES1: reward for threat reduction

RES2: reward for conservation or investment

CES1: compensation for damage (e.g. pollution, biodiversity offsets)

CES2: compensation for foregone use (e.g. tradable harvest rights)

Production function

Pressure and threats

Investment & mana

EcosystemStewards

gement

Conservation

36

Characteristics of the mechanisms:

a. Nature of the contract or agreement among the stakeholder groups. Are there individual or

group contracts, enforcement agency (statutory or customary authorities?)

b. Transaction costs of establishing and operating the mechanism, including information,

contracting and enforcement; distribution of those transaction costs;

c. Type of remuneration or incentives provided as compensation or rewards. Is there quid pro

quo exchange of money for divisible, excludable goods, as normally is the case for

provisioning goods? Are more secure property rights, public services or extension services

explicit or implicit components of the contract or agreement?

d. What market-based instruments are used? Market-based instruments are tangible pieces of

evidence of environmental services that are issued or certified by some public or private

authority and backed by the reputation or legal sanction held by that authority. Market-

based instruments for environmental services have been created to encourage private-

sector enterprises to internalize the environmental externalities of their actions. Trade in

those market-based instruments is intended to increase the efficiency in the way that

environmental costs are born by the overall economy. Examples of market-based

instruments include Certified Emission Reductions (backed by the Executive Board of the

Clean Development Mechanism and certified by reputable private firms) and wetland

credits backed by the US Army Corps of Engineers and United States Wetland Mitigation

Banking Program (see http.ecosystemmarketplace.com).

e. Temporal pattern of payment. Is the payment a recurrent payment to offset the opportunity

costs of lower returns or a lump sum which is assumed to facilitate ecosystem stewards to

make the investments necessary to surpass some type of threshold?

4.6 Characterization of the external environment and drivers

Figure 1 illustrates the relationships between different functional groups and ecosystems

services within an ecosystem. Figure 2 recognizes that these interactions occur within a

broader social and environmental context. Different driving forces – social, economic and

environmental – act upon the system in this larger context.

37

EcosystemService

Beneficiaries

EcosystemServiceModifiers

Ecosystem Service

Intermediaries

EcosystemStructure &Function

Ecosystem Services

Production

Regulating

Cultural Compensation For Ecosystem

Service Mechanisms

External social context & drivers:

Pressure and threats Investment & management

External environmental context & drivers:spatial distribution, temporal fluctuations, cause - effect relations

EcosystemService

Beneficiaries

EnvironmentalService

Beneficiaries

EcosystemServiceModifiers

EcosystemStewards

Ecosystem Service

IntermediariesIntermediaries

EcosystemStructure &Function

Ecosystem Structure & Function

Ecosystem Services

Production

Regulating

Cultural Compensation and Reward Mechanisms

External social context & drivers: Institutions, markets, poverty, technologies

Pressure and threats Investment & management

External environmental context & drivers:spatial distribution, temporal fluctuations, cause - effect relations

Figure 2. Illustration of the external factors shaping compensation and rewards for environmental services.

International political and economic environment – Multilateral environmental agreements,

international development assistance flows, foreign direct investment, expectations of

corporate social responsibility.

Climate conditions – Short and long-duration climate events, including extreme rainfall events,

El Niño events and global warming.

National political and economic environment – Policies, strategies and regulations affecting

the environment, water, governance and property rights. ICRAF Working Papers 38 and 39 in

this series explores the importance of internal and external conditions in determining the

effectiveness of CRES mechansims.

5. Public policy context, expectations and compensation and rewards for environmental services

An issue that was repeatedly stressed in the regional workshops and other public presentations

of the results of this scoping study was the context of public policy and social expectations

within which contracts and negotiated agreements are worked out. Several interesting lines of

argument emerged.

38

In some national contexts, particularly India, it was repeatedly stressed that the government

has responsibility for ecosystem management in the country. Following this line of argument,

the government is the trustee of ecosystem management on behalf of the people, if there is

degradation of ecosystems and environmental services; it is because the government has failed

to adequately discharge its responsibilities as trustee. Emphasis should be placed on

strengthening the trusteeship role of government or devolving those roles to different tiers of

government or user groups. While this argument was presented most clearly in India, it likely

would hold sway in any context of strong state control of the economy and the natural resource

base. However, experience from around the developing world shows that certain types of

compensation and reward mechanisms may be perfectly well aligned with this trusteeship role,

especially the large state systems of payment in South Africa (Working for Water), China and

Meso-America. Self-organized deals and eco-labelling arrangements may play less of a role in

such situations.

In other national contexts, particularly in East Africa and the Andes, there were arguments

about the problems of “paying people to obey the law”. That is, a number of fairly strict

national laws and regulations are in place, but are generally disregarded by ecosystem

stewards and poorly enforced by intermediaries. Mechanisms of reward for environmental

services have the potential to reward people for simply doing what they should be doing

anyway. Some of the agencies involved as intermediaries in these mechanisms stressed that

they make sure that their mechanisms are fully consistent with the law, sometimes employing

deliberate language to ensure that compliance. The Wildlife Consolation Programme in the

Kitengala Plains of Kenya deliberately uses the word ‘consolation’ to describe their payments

for loss of livestock due to predators, since the Kenya Wildlife Act does not allow for

‘compensation’ for damage caused by wildlife. Other agencies involved as intermediaries

indicated that they did not pay full attention to the dictates of formal law, but rather considered

the local social norms of behaviour. If the local norm was to cultivate steep hillsides in water

catchment areas, then farmers should be rewarded to forego that practice, even if there is an

unenforced national law that prohibits the practice.

At a recent workshop on bylaws for natural resource management, two alternative lines of

argument emerged regarding social expectations and public policies affecting natural resource

management. In countries that have embraced decentralized forms of government, such as

39

Uganda and Tanzania, local authorities have a stronger mandate to develop new bylaws that

respond to local needs and are consistent with local expectations. It can be argued that such

bylaws establish the norms of behaviour versus compensation and rewards for environmental

services. In those countries, and most others in Africa, it was noted that many of the laws with

influence on land use and ecosystem management are framework laws that define policy

objectives and new organizations (e.g. Water Users’ Associations and the Water Resource

Management Authorities in Kenya’s Water Act of 2002), but leave specific regulations to

more decentralized processes and organizations. In that case, new mechanisms for

compensation and reward for environmental services may provide important test cases and

case law for defining expectations.

Another line of argument that emerged through the regional workshops was that experience

with new mechanisms of compensation and reward for environmental services may actually

prompt changes in social expectations of acceptable behaviour. This adaptive learning role of

compensation and reward for environmental services may be deliberately built into the

mechanism design – as in the first commitment period of the Kyoto Protocol, or an inadvertent

product of the process.

Overall, what emerges is the need to carefully consider compensation and rewards for

environmental services versus minimum acceptable behaviour, using compensation

mechanisms to try to punish those who fail to comply with minimally acceptable behaviour,

the standard set of regulations and social norms to encourage continuation of minimally

acceptable behaviour, and rewards to encourage behaviour which is recognized as particularly

good for ecosystem function and services. These types of behaviour are indicated in Figure 3

using the analogy of the traffic light. Red light behaviour fails to meet minimum social

expectations and thus should be punished in the form of fines and / or compensation payments.

Compensation payments are designed to prompt beneficiaries to move toward amber light,

socially-acceptable, behaviour. Amber light behaviour is consistent with social expectations.

And green light behaviour exceeds social expectations by enough to warrant particular reward.

Rewards should be sufficient to prompt ecosystem stewards to adopt such land uses. The trend

lines indicated in the third column of Figure 3 indicate the possible trends in social

expectations over time as resource conditions change and compensation and reward

mechanisms are put in place.

40

Public policy context: Actor position Trend Mechanism

CES1: Polluter pays compensation for damage inflicted

CES2a: Tradable pollu-tion and ES-use rights as ‘offsets'

CES2b: Tradable pollu-tion and ES-use rights bought for conservation sake

RES1: Rewards for ES enhancement through ‘stewardship’

RES2: Rewards for ES maintenance (avoided degradation) by guardians

Minimum acceptable

behaviour and its effect on

ES is set by regulation

Baseline of ‘business as

usual’ under current driver

conditions

RED Unacceptable environmental degradation

Amber Current practice and

‘rights to pollute’

Green Maintenance and

enhancement of ES

Figure 3. Public policy and social expectations context for compensation and rewards for environmental services.

Hatfield-Dobbs (2006) discusses the dynamic relationship between voluntary compensation

and rewards, social expectations, and regulations. Figure 4 depicts a stylized situation in which

community preferences for good environmental management increase over time, leaving a gap

between what is generally desired and what is required by existing policy and regulation. This

gap is similar to the yellow light zone depicted in Figure 3. Compensation and rewards for

voluntary action can help to fill in this gap, with the gap narrowing over time as new

mandatory standards come into force.

41

Figure 4. Contrasting perspectives on who should pay: phased polluter pays approach (favouring environmental and fiscal interests). Source: Hatfield-Dobbs 2006, adapted from Young et al. (2003).

Hatfield-Dobbs proposes that this dynamic situation will only hold if there is a strong polluter

pays principal underlying the environmental policy. If, on the other hand, there is a voluntary

beneficiary pays principle underlying policy, which favours resource user interests, then the

mandatory standards or duty of care may change very gradually, increasing the space for

voluntary reward mechanisms over time. This situation is depicted in Figure 5.

Figure 5. Contrasting perspectives on who should pay: voluntary beneficiary pays approach (favouring environmental and resource user interests). Source: Hatfield-Dobbs, 2006.

6. Overview of CRES mechanisms and perspectives

In this section we attempt to sum up current experience and perspectives on CRES in

developing countries. Table 3 presents a summary of twelve prototype reward mechanisms

that are observed in developing countries, particularly in Asia where the RUPES project is

implemented. The first six mechanisms are generally grouped under the heading of watershed

services, with the relative demand for specific services varying from place to place. Prototype

mechanisms 7 and 8 focus on biodiversity conservation, 9 and 10 focus on sequestration and

conservation of carbon stocks, and 11 and 12 focus on overall environmental standards and

landscape beauty. Column 1 summarizes the environmental service; column 2 presents

information on the providers of the environmental services and the services that they can

42

potentially sell; column 3 presents similar information on the users of the environmental

services and the factors affecting their willingness to pay; and column 4 presents information

on main issues that hamper or hinder the development or operation of those RES mechanisms.

Table 3: Environmental service reward prototypes

Environmental service

Providers/ sellers Users / buyers Main issue

1. Total water yield for hydroelectricity via storage lake

Impacts on total water yield small; reservoir sedimentation issue may dominate the debate; option for sediment traps and landscape filters

Consumer satisfaction depends on continued functioning; high project investment costs, little subsequent management flexibility

Intercepting sediment flows rather than avoiding them is generally easier to accomplish; sediment flows out of well-managed upper catchments may still be high because of geological and geo-morphological processes

2. Regular water supply for hydro-electricity via run-off-the-river

A change from soil quick flow (saturated forest soils) to overland flow will have some effect on buffering of river flows and hydroelectric operation time

Consumer satisfaction depends on continued functioning; high project investment costs, little subsequent management flexibility

Interventions influencing the speed of drainage (linked to paths, roads and drains) have the most direct effect on buffering at larger scales

3. Drinking water provision (surface or groundwater)

Intensive agriculture and horticulture will cause rapid pollution of surface flows and slow but persistent pollution of groundwater flows with nitrogen and pesticides; people residing around streams cause pollution E.coli and diseases

Willingness to pay for drinking water depends on quality assurance from medical perspective, as well as taste

Slow response of groundwater flows to changes in the pollutant status make ‘regulation’ a more effective solution than results based markets

4. Flood prevention

Land-use effects strongest for flow buffering of small-to-medium sized events, with saturation dominating the large events

Relevance of upland land use depends on location (‘floodplains’) and engi-neering solutions (dykes, storage reservoirs)

Risk avoidance for the rare category of large events

5. Landslide prevention

Mortality of deep-rooted trees (‘anchors’) causes temporary increase in landslide risk

Relevance depends strongly on location in the flow paths

Deep landslides are little affected by land cover

6. General watershed rehabilitation and erosion control

Promoting tree cover and permanence of litter layer protecting the soil is a good precaution

‘Holistic’ perception of watershed functions survives despite the lack of clear impacts on specifics

Communication gap with scientists who try to enhance clarity

7. Biodiversity buffer zones around protected area

Use value of buffer zones depend on hunting restrictions, presence of human-life threatening species

Flagship species still dominate the public perception of value

Push and pull factors in human land use; livelihoods operate at larger scales than most conservation plans acknowledge

43

Environmental service

Providers/ sellers Users / buyers Main issue

8. Biodiversity landscape corridor

Still new concept in agriculture/forest land use mosaics in the tropics; use value of patches in the ‘stepping stones’ similar to the buffer zone case

Relevance depends on dispersion properties of the species of main interest; sometimes higher connectivity not desirable; relevance in-creases with climate change concerns

Ex ante impact assessment of effectiveness is still difficult

9. Restoring carbon to degraded landscapes

Options for profitable tree restocking primarily depend on policy reform

Demand is for Certified Emission Reductions (CER) rather than carbon

Additionality issues in the Clean Development Mechanism; high transaction cost

10. Protecting soil and tree stocks of carbon

Road construction (accessibility) is main determinant of ‘opportunity costs’ for non-conversion

Demand is for Certified Emission Reductions (CER) rather than carbon

Not recognized as part of the Clean Development Mechanism

11. Guaranteeing production landscapes meet environmental standards

Where the ‘ecolabel’ process starts from the consumer side, there can be a substantial gap in communication and trust, leading to high transaction costs

Consumers with high sense of personal responsibility; gradually replaced by the introduction of standards and the raising of baselines of ‘acceptable’ behaviour

Relevance of global standards in the face of variation in local conditions; transparency of the standards and compliance monitoring; transaction costs

12. Providing guided access to landscapes of beauty/ heritage/ recreational value

The local and international appreciation for landscape beauty depends on culture and time (fashion); rewards are for roles as guide and providers of accommodation, food, transport 7 handicrafts; gender aspects of provider roles may be prominent

The appreciation of landscape beauty and cultural traditions does not reduce the need to provide security and comfort to potential tourists

Global ecotourism is a highly volatile market where security and political concerns can interfere

Source: Authors’ summary of experience, personal observations and review of the literature on RES mechanisms in developing

countries

From the international literature, and particularly from the discussions held at international

conferences and workshops on CRES, it is possible to discern distinct perceptions of CRES

mechanisms among analysts, donors and other stakeholders. The following paragraphs present

our characterization of these different perceptions. We draw special attention to cases that

were presented at the regional workshops.

Wildlife conservation perspective. CRES is mostly viewed as a source of conservation finance

that may or may not complement or replace public funding and entry fees. Compensation

mechanisms, such as the consolation mechanism instituted around Nairobi Park in Kenya, are

44

used to compensate farmers for damage to livestock and crops caused by wildlife. Reward

mechanisms, such as the wildlife lease program also operating around Nairobi Park, may

provide land owners with additional incentive to maintain wildlife corridors (see Ochieng,

Otiende and Rumley 2007). Among the wildlife conservation community, there continues to

be significant skepticism about the potential for CRES mechanisms, especially mechanisms

such as the Clean Development Mechanism that may result in trading water and biodiversity

for carbon.

Environmental management perspective. CRES may be mostly viewed as a way to provide

positive incentives for good environmental stewardship to go along with the standard set of

environmental regulations. As discussed in the literature review above, the movement toward

CRES in the developing world is part of a more general global trend toward negotiation and

softer environmental regulation. Many of the participants in the regional workshops expressed

interest in CRES mechanisms for resolving conflicts over resource access and benefit sharing.

Poverty reduction perspective. CRES may be mostly viewed as a possible alternative income

stream for poor people, that is, a new way to ‘put money in farmers’ pockets’. This emerged as

a dominant perspective at the African regional workshop. At the Latin America and Asia

regional workshops, on the other hand, many participants expressed concerns that CRES

mechanisms, particularly carbon finance mechanisms, might also dispossess indigenous and

poor people. This perspective has been strongly expressed in media reports of carbon

sequestration projects in Uganda and in statements by indigenous people’s groups in Latin

America (see Poats 2007). Indeed the RUPES project in SE Asia was distinctly designed to

explore the potential for pro-poor mechanisms

(www.worldagroforestrycentre.org/sea/networks/rupes).

Economic planning perspective. CRES may be mostly viewed as a flexible and efficient way

of correcting market failures and collective action problems. The papers by Ferraro and Kiss

(2002) and Pagiola et al. (2002, 2004) express this perspective.

Rural empowerment and social equity perspective. CRES may be mostly viewed as a way to

redress historical imbalances in the power, rights and responsibilities of resource-dependent

people vis-a-vis environmental service beneficiaries who often enjoy greater influence over the

political and economic processes. This perspective is particularly evident in the RUPES

45

programme in SE Asia. From a peace and justice perspective, compensation for environment

services may be viewed as a mechanism for managing conflicts over resource use or benefit

sharing.

Business perspectives. There appear to be multiple business perspectives on CRES: a)

redressing environmental damage caused by business operations as a legal or ethical

imperative; b) a component of a corporate social responsibility strategy designed to maintain

or enhance the reputation of the business; c) complying with current or likely future

environmental regulations; or d) sustaining or improving crucial environmental services that

are inputs into business operations. Recent publications by Waage et al. (2007), Roberts and

Waage (2007) and Earthwatch Institute et al. (2006) summarize information on these multiple

motivations of business. Compliance with current environmental regulations – particularly in

the European Union Emission Trading Scheme – is the major factor driving the interests of

European business interests in the carbon trade. Compliance with likely future environmental

regulations is driving U.S. business interests in the Voluntary Carbon Market.

Farmers and ecosystem stewards. The people who live within key ecosystems may also see

CRES from several perspectives: a) official recognition of their rights to reside in, use and

modify a protected ecosystem; b) a new government program that provides public services in

exchange for formation of groups and / or planting trees; c) a new source of revenue for

performing a defined service; or d) a new way for governments and powerful interest groups to

dispossess people from their land. ICRAF and Lampung University have recently conducted a

conjoint analysis study of farmers’ preferences over the elements of conditional social forestry

contracts in Sumatra and found that farmers place highest weight on recognition of their rights

and some of the public services that they relate with the social forestry contracts.

Environmental service beneficiaries seeking redress for environmental damage caused by

others may see compensation for environmental services as one of several ways to redress past

grievances. Voluntary compensation payments, negotiated outside of the legal system, may

prove to be more effective than legally enforced payments.

46

7. Conclusions

Previous sections of this paper have reviewed the concepts and provided an overview of recent

historical development of conservation and environmental policy across the globe.

Conservation organizations have become increasingly interested in the possibility of using

compensation and rewards for environmental services (CRES) as a way to make more efficient

use of available funds and for sustaining conservation outcomes over the long term. At the

same time, the policy, regulatory and business environments within developing countries are

generally becoming more conducive to CRES mechanisms. Adding to this situation, there is

increasing interest in CRES mechanisms by a variety of other agencies, including United

Nations organizations, development donors, and non-governmental organizations. Explicitly or

implicitly, these various organizations have different perspectives on CRES: wildlife

conservation, environmental management, poverty reduction, economic planning, rural

empowerment, business, ecosystem steward, or ecosystem beneficiary seeking redress.

The situation unfolding in the developing world should be seen as part of a global trend toward

more flexible, market-oriented and consensus-based environmental policy. As governments

are becoming less involved in the strict enforcement of hard environmental regulations, non-

governmental organizations, international organizations, and civil society organizations are

becoming more involved in exerting pressure on companies to adopt good business practices

toward the environment. Among the countries of Europe and North America, the portfolio of

environmental policy instruments varies considerably from country to country, and industry to

industry, with regulations still forming the backbone of environmental management in all

countries. We should similarly expect that systems of compensation and reward for

environmental services will vary from country-to-country and case-to-case across the

developing world.

The overall experience with soft and market-based environmental policy instruments suggests

that interest in compensation and reward for environmental policy will emerge for different

reasons in different contexts:

a. In a pro-growth policy environment, market-based schemes may be used to reduce the

economic impact of tightening environmental regulation by allowing companies and

industries flexibility in the way they adjust to environmental regulations. This is the

47

primary justification for the emission trading regimes in the United States and a major

motivation for the Clean Development Mechanism of the Kyoto Protocol. While many

developing countries are engaging in the Clean Development Mechanism, there is little

evidence of market-based schemes emerging spontaneously in developing countries.

b. In an environment where governments lack the political will or credibility to enforce new

environmental regulations on powerful rural interests, they may use public compensation

and rewards for environmental services as an extra enticement for adhering to legal or

social expectations of behavior. This appears to be in the case in some of the Latin

American countries that have been the biggest adopters of these mechanisms (e.g. Costa

Rica, Mexico, see Poats, 2007).

c. In an environment where there are public funds available for rural poverty reduction and

environmental management, public compensation and reward mechanisms may be seen as

a convenient way to advance both objectives. This appears to be the case in the ‘Pagos por

Servicios Ambientales Hidrologicos’ project in Mexico (see Poats 2007) and the Working

for Water Programme in South Africa (see Ochieng, Otiende and Rumley 2007). This type

of environment may hold greatest prospect for joining up environmental management and

poverty reduction.

d. In an environment where there has been liberalization and restructuring of public services

for water supply and electricity generation, there may be major new openings for business

managers to meet their business objectives in new ways. The interests of the Nairobi City

Water and Sewerage Company or the Quito Water Company in payments for watershed

service mechanisms may be largely due to changes in water management institutions in

the two countries.

e. In a situation where new environmental problems are coming to the notice of regulatory

agencies and the general public, private businesses may see compensation and reward

mechanisms as way to forestall or anticipate new environmental regulations. This appears

to be the situation of the companies that have been willing to invest in voluntary carbon

markets (Bayon, Hawn and Hamilton 2006).

f. In a situation of growing consumer wealth and global awareness, there will be an increase

in the number of consumers willing to pay price premiums for products that are produced

in an environmentally-sustainable manner. Eco-labelling programmes can therefore offer

environmentally-aware consumers with new ways to express differentiated demands /

48

awareness for the benefits of fair trade and sustainable production (green labelling and fair

trade). Experience with eco-labelling schemes to date, however, indicates that there is a

potential for these schemes to be biased against smallscale farmers in developing countries

(Gallastegui 2002).

g. In a situation of historical conflict over the use of natural resources, governments,

communities and other interested parties may see CRES mechanisms as new ways to

resolve conflicts without ‘giving in’. This may explain, for example, the interest in

conditional social forestry contracts in Indonesia.

h. Other papers in this series will address some of these issues in more detail. The paper by

Iftikhar et al. (ICRAF Working Paper no.36) considers the links between CRES and

human well-being in more detail, drawing upon recent understanding of the multi-

dimensional nature of human well-being and the links to ecosystem services. The paper by

Van Noordwijk et al. (ICRAF Working Paper no.37) presents a discussion of the criteria

that should be used to assess CRES mechanisms in developing countries – realistic,

conditional, voluntary and pro-poor – as well as some indicators of those criteria. Swallow

et al. (ICRAF Working Paper no.38) pick up many issues from this introductory paper in

an analysis of the conditions in which CRES mechanisms are most likely to be effective.

Bracer et al. (ICRAF Working Paper no.39) focus on the governance and CRES

mechanisms, with some special focus on community involvement. The final paper by

Scherr et al. (ICRAF Working Paper no.40) presents a more thorough review of the

current status of CRES mechanisms, a forward-looking analysis of the likely evolution of

the different types of mechanisms over the next 20 years, and an analysis of the

mechanisms with greatest potential to benefit the poor in developing countries.

49

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ICRAF Working Papers

2005-2006

1. Agroforestry in the drylands of eastern Africa: a call to action

2. Biodiversity conservation through agroforestry: managing tree species diversity within a network of community-based, nongovernmental, governmental and research organizations in western Kenya.

3. Invasion of prosopis juliflora and local livelihoods: Case study from the Lake Baringo area of Kenya

4. Leadership for change in Farmers Organizations: Training report: Ridar Hotel, Kampala, 29th March to 2nd April 2005

5. Domestication des espèces agroforestières au Sahel : situation actuelle et perspectives

6. Relevé des données de biodiversité ligneuse: Manuel du projet biodiversité des parcs agroforestiers au Sahel

7. Improved Land Management in the Lake Victoria Basin: TransVic Project’s Draft Report

8. Livelihood capital, strategies and outcomes in the Taita hills of Kenya

9. Les espèces ligneuses et leurs usages: Les préférences des paysans dans le Cercle de Ségou, au Mali

10. La biodiversité des espèces ligneuses: Diversité arborée et unités de gestion du terroir dans le Cercle de Ségou, au Mali

11. Bird diversity and land use on the slopes of Mt. Kilimanjaro and the adjacent plains, Tanzania

12. Water, women and local social organization in the Western Kenya Highlands

13. Highlights of ongoing research of the World Agroforestry Centre in Indonesia

14. Prospects of adoption of tree-based systems in a rural landscape and its likely impacts on carbon stocks and farmers’ welfare: the FALLOW Model Application in Muara Sungkai, Lampung, Sumatra, in a ‘Clean Development Mechanism’ context

15. Equipping Integrated Natural Resource Managers for Healthy Agroforestry Landscapes.

16. Are they competing or compensating on farm? Status of indigenous and exotic tree species in a wide range of agro-ecological zones of Eastern and Central Kenya, surrounding Mt. Kenya.

17. Agro-biodiversity and CGIAR tree and forest science: approaches and examples from Sumatra

18. Improving land management in eastern and southern Africa: A review of polices.

19. Farm and Household Economic Study of Kecamatan Nanggung, Kabupaten Bogor, Indonesia: A Socio-economic base line study of Agroforestry Innovations and Livelihood Enhancement

20. Lessons from eastern Africa’s unsustainable charcoal business.

21. Evolution of RELMA’s approaches to land management: Lessons from two decades of research and development in eastern and southern Africa

22. Participatory watershed management: Lessons from RELMA’s work with farmers in eastern Africa.

23. Strengthening farmers’ organizations: The experience of RELMA and ULAMP.

24. Promoting rainwater harvesting in eastern and southern Africa.

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25. The role of livestock in integrated land management.

26. Status of carbon sequestration projects in Africa: Potential benefits and challenges to scaling up.

27. Social and Environmental Trade-Offs in Tree Species Selection: A Methodology for Identifying Niche Incompatibilities in Agroforestry [Appears as AHI Working Paper no. 9]

28. Managing Trade-Offs in Agroforestry: From Conflict to Collaboration in Natural Resource Management. [Appears as AHI Working Paper no. 10]

29. Essai d'analyse de la prise en compte des systemes agroforestiers pa les legislations forestieres au Sahel: Cas du Burkina Faso, du Mali, du Niger et du Senegal.

2007

30. Etat de la Recherche Agroforestière au Rwanda Etude bibliographique, période 1987-2003.

31. Science and Technological Innovations for Improving Soil fertility and Management in Africa.

32. Compensation and Rewards for Environmental Services in the Developing World: Framing Pan-Tropical Analysis and Comparison.

33. Report on the Latin American Regional Workshop on Compensation for Environmental Services and Poverty Alleviation in Latin America.

34. Asia Regional Workshop on Compensation for Ecosystems Services. A component of the global scoping study on compensation for ecosystem services.

35. African Regional Workshop on Compensation for Ecosystem Services (CES)

36. Exploring the inter-linkages among and between Compensation and Rewards for Ecosystem Services (CRES) and human well-being: CES Scoping Study Issue Paper no. 1.

37. Criteria and indicators for environmental service compensation and reward mechanisms: realistic, voluntary, conditional and pro-poor: CES Scoping Study Issue Paper no. 2.

38. The conditions for effective mechanisms of Compensation and Rewards for Environmental Services (CRES): CES Scoping Study Issue Paper no. 3.

39. Organization and governance for fostering pro-poor Compensation for Environmental Services: CES Scoping Study Issue Paper no. 4

40. How important will different types of Compensation and Reward Mechanisms be in shaping poverty & ecosystem services across Africa, Asia & Latin America over the next two decades? CES Scoping Study Issue Paper no. 5.

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www.worldagroforestry.org

Who we are

The World Agroforestry Centre is the international leader in the

science and practice of integrating 'working trees' on small farms and

in rural landscapes. We have invigorated the ancient practice of

growing trees on farms, using innovative science for development to

transform lives and landscapes.

Our vision

Our Vision is an 'Agroforestry Transformation' in the developing world

resulting in a massive increase in the use of working trees on working

landscapes by smallholder rural households that helps ensure security in

food, nutrition, income, health, shelter and energy and a regenerated

environment.

Our mission

Our mission is to advance the science and practice of agroforestry to help

realize an 'Agroforestry Transformation' throughout the developing world.